Regional President Speech

THE HUMAN SIDE OF THE FEDERAL RESERVE — OBSERVATIONS IN RETROSPECT Before the 66th Annual Convention of the New Jersey Bankers Association on Thursday, May 22, 1969 A tlantic City, New Jersey Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis E V I E W M a y 1 9 6 9 PMIlLAlDESILJPIHniA The Human Side of the Federal Reserve- Observation in Retrospect The Appeal of Black Capitalism Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis y/The Human Side of the Federal Reserve— Observations in Retrospect ... Although the Federal Reserve deals with numbers and economic forcgS, human values are of ultimate concern. The Appeal of Black Capitalism . . . A new approach to the economic problems of Negroes offers some hope, but faces certain economic stumbling blocks. BUSINESS REVIEW is produced in the Department of Research. Evan B. Alderfer is Editorial Consultant; Ronald B. Williams is Art Director. The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Public Information, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BUSINESS REVIEW Twenty-eight years ago I reversed Horace Greeley’s advice and moved East from the Uni­ versity of Missouri to the Federal Reserve Bank of Philadelphia. This is the twelfth time I have sat here at the head table and the last time I shall address you in my present capacity. I should like, therefore, to use this opportunity to make some long-run observations about the The Human Side of Federal Reserve System. Much has happened during my Federal Re­ The Federal Reserve — serve career. We have been in three wars; we have been served by six Presidents. We have Observations in seen fantastic accomplishments in the sciences and in the arts. Among the most exciting have Retrospect’"’ been the astronauts’ ventures into space. In reading about reactions of the men who circled the moon some five months ago, I have been by Karl R. Bopp impressed by the perspective of the earth that President one gets from a quarter of a million miles away. Federal Reserve Bank Viewed from that distance, geographical bar­ of Philadelphia riers vanish, international divisions fade away. Removed from daily chores, one gets a different perspective of life. Today, as we look together at the Federal Reserve, I shall take an “as­ tronaut’s” view. As I do this, I am struck by how many issues fall away into insignificance. What is left, what stands out as the only thing worthwhile, is people—human beings. This observation may appear rather obvious, but it is one we tend to forget as we go about our day-to-day activities and face our momentary troubles. When all is said and done, perhaps the greatest advance in my time—greater than all the scientific achievements—has been the increasing affirmation of human values. This is what gives me greatest satisfaction in surveying the past and most hope in assaying the future. Today, therefore, I should like to center my remarks on some human aspects of the Federal Reserve—the “people side” of the Fed. In par- *An address given at the 66th Annual Convention of die New Jersey Bankers Association, May 22,1969. S Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis MAY 1969 ticular, I shall look at (1) monetary policy, (2) just numbers—not just price indices or unem­ decision-making in the Federal Reserve, and (3) ployment rates—that must be minimized or relationships between the Federal Reserve and maximized. It is the quality of human life that commercial banks. is of paramount concern. I know the pain of un­ employment. During the depression of 1921, my father, who was a carpenter, found himself MONETARY POLICY out of work. The pain of unemployment is not As you know, the Federal Reserve System, as just economic—it is emotional and psycholog­ the nation’s central bank, has a manifold task, ical as well. For the disadvantaged the cost in concerning itself with full employment, price terms of human achievements foregone is borne stability, and the balance of payments. From any by generations. perspective, this is a most formidable task. It Although these costs always have existed, is formidable, for one reason, because the they have come to the forefront of public policy economy consists of over 200 million individuals in the past twenty-five years. The searing effect making their own economic decisions and sub­ of the Great Depression survived the prosperity ject to quickly changing mass psychology. of World War II and found its expression in The difficulty of the Fed’s task is compounded the Employment Act of 1946. That piece of by the apparent conflicts, at least in the short legislation is perhaps the most important single run, among its objectives. We must help keep affirmation in our lifetime of the concern of the economy as fully employed as possible with­ this nation for the plight of the economically out risking runaway conditions which could disadvantaged. It helps to explain much of what lead to inflation and, ultimately, depression. We has happened since. It helps to explain, for must attempt to achieve favorable conditions on example, why this country, after World War II, both the domestic and international fronts. We and unlike its experience after every other must try to maintain an economic environment major war in its history, did not suffer a sharp in which all people who are willing, able, and recession. It helps explain why prices did not seeking work can find jobs, but at the same time decline sharply as they had after the Revolu­ maintain the real income of those in retirement. tionary, the Civil, and the First World War. Often the Fed has to trade-off one objective Elevation of human values to a position of top against another. For example, we may have to priority, in short, has produced an economy that be content with less than maximum immediate is more humane. But it has immensely compli­ growth of our domestic economy in order to cated the task of those who are responsible for keep our balance of payments from deteriorating guiding that economy. It is no longer acceptable to the point that we cannot play a leading role to take the view, once prevalent, that depres­ in the world economy. We may have to accept sions are necessary periodically to purge the some inflation to achieve full employment—or economy of its “excesses.” The difficulty the some unemployment to contain inflation. Federal Reserve faces today in restraining infla­ In all these possible trade-offs, human values tion stems partly from its concern for social are uppermost. The damage which inflation can justice. With 22 per cent of nonwhite teenagers inflict on the growing number of people living out of work even now when the economy is on fixed incomes has to be measured against the going at full steam, it is clear who would be damage which unemployment can bring to an­ first to feel a recession. Yet the costs of con­ other large sector of our population. It is not tinuing inflation, though somewhat less appar­ Digitized for FRASER 4 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BUSINESS REVIEW ent, hit hardest our older citizens who also are more I am convinced that pat formulas for ill equipped to meet those costs. reaching decisions do not exist. The tasks of As these human costs have come to the fore, policy-makers would be easier if some magic society has greatly narrowed the margin of error formula were available. But the ever-changing it permits its officials, including the Federal Re­ nature of the variables with which the Fed is serve. We now work within much closer toler­ concerned precludes a simplistic approach to ances than even ten years ago. Thus, even decision-making. We must rely upon judgment— though the economy has been performing better, judgment solidly grounded in theory but sensi­ on average, than ever before, we have been tive to new developments and to new priorities. criticized—understandably—for overdoing re­ In making these judgments, the Federal Re­ straint in 1966 and for excessive ease in 1968. serve System relies heavily on a pluralistic de­ Let me make myself clear. I am not conclud­ cision-making process. We are convinced that ing that the Federal Reserve—or anyone else— all truth does not reside in one place or in one has tamed the business cycle. I remember too man. Judgments are based on a free interplay of well the widespread complacency of the late ideas flowing from the member banks, the 1920’s. But I do believe that increasing emphasis boards of directors and staffs at the Reserve on human values has greatly changed the size of Banks, and the Board of Governors in Washing­ the stakes. The public is not willing to tolerate ton. I have seen this work; and it works well— gross errors of the 1929-1933 variety. Federal not perfectly, but well. One advantage of the Reserve and other public officials must perform— process, of course, is that it adds stability. Ideas or else. This raises the question of the kind are cross-checked, balanced against other ideas, of people making decisions in the Federal Re­ and compromised. The chances of the Fed going serve and how they go about making them— off half-cocked are remote. my second point. I am increasingly impressed, however, by another advantage of this approach, and this is DECISION-MAKING IN THE FEDERAL RESERVE one that is less often recognized. John Gardner Decisions are made in the Federal Reserve in has touched on it. He has written: “In an or­ an atmosphere of less than perfect information. ganization with many points of initiative and Over the years we have collected vast amounts decision, an innovation stands a better chance of statistics and have learned a great deal about of survival; it may be rejected by nine out of how our economy functions, how financial ten decision makers and accepted by the tenth. markets function, and how the impact of mone­ If it then proves its worth, the nine may adopt tary policy is transmitted through financial insti­ it later.” With the Federal Reserve under such tutions and markets to people who make spend­ great pressure to perform in this fast-paced ing decisions. But the more we learn, the more economy, it stands much more chance of coming it is apparent that there is still much more to up with a break-through idea under this arrange­ learn about this exceedingly complex economy. ment than under one in which all authority is A multitude of factors affects our economic centralized. environment. These factors, as well as the rela­ This is the great strength of the System’s tionships among them, are changing constantly. structure. I have attended some 179 meetings So, pushing out the frontiers of knowledge is an of the Federal Open Market Committee—meet­ essential, but difficult, task. ings in which seven Governors and twelve Pres­ The longer I participate in policy-making, the idents and perhaps half a dozen staff members Digitized for FRASER 5 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis MAY 1969 have something to say. Although the spirit of money. True, you want to serve your com­ inriovation has not been present at every one of munities and protect your depositors, but these these meetings, I have seen it often enough to are subsidiary motivations. The Federal Reserve, be convinced of the value of this kind of group on the other hand, exists primarily to further participation. the public welfare. And although it is not moti­ In the course of perhaps 288 meetings of the vated by a desire to keep you from making board of directors of the Federal Reserve Bank money, it must at times, and in different ways, of Philadelphia, I have seen this spirit often frustrate your plans and desires. It does this in enough to be convinced that the Reserve Banks carrying out its responsibility for monetary and the System as a whole are much better run policy and frequently as a banking supervisor. because of this kind of decision-making. We have in this situation the makings of a And, finally, I have seen the same dynamism first-class confrontation. But this will not result at work within the staff of the Federal Reserve in violence if we understand and respect each Bank of Philadelphia. I am sure the same high- other’s motivations. Let me give two examples. quality results would not have been forthcoming The first stems from the ingenuity of the had I been making all the decisions—even if it human mind in devising ways to get around con­ had been physically possible for me to do so. trols. Bankers may not always have exhibited The process can work, the structure can hold this characteristic, but they are now making up together, however, only so long as we can at­ for lost time. tract and hold top-notch men. And we can do Bankers today are an innovative breed. They this only so long as we can offer them oppor­ dream up new services, new approaches to the tunities to contribute. provision of old services, and the means of satis­ fying a greater array of the public needs. I am RELATIONS WITH COMMERCIAL BANKS making no moral judgment when I point out After much trial and error, I have concluded that bankers devote considerable resources to that one of the essential ingredients for getting devising means of circumventing restrictions on along with my fellow man is a mutual under­ these activities. Recently, a number of ingenious standing of and respect for motivations. This devices have appeared. These devices have en­ is no less true for institutions. abled banks to secure funds in a time of restric­ Recently, Professor Richard A. Falk, Milbank, tive monetary policy and despite a ceiling on Professor of International Law at Princeton interest rates on time deposits. Some banks University, noted that “John Maynard Keynes have grouped portions of their loan portfolios long ago spoke of the paradox of aggregation— and have sold participations in these pools of that the definition of rational self-interest is dif­ loans. We have seen one-bank holding com­ ferent for the individual than for the commu­ panies secure funds through the sale of commer­ nity. If one’s car is polluting the atmosphere, the cial paper and then channel these funds to the addition to the general pollution is so infinites­ subsidiary commercial bank. We have seen imal that there is no rational incentive to fore­ banks attach letters of credit to obligations of bear from driving, or to spend money on their prime customers so that these obligations anti-pollution filters.” This paradox helps to may be sold in the market. explain the relationship between the Federal As bankers have devoted many hours in de­ Reserve and commercial banks. vising ways of circumventing regulations, mone­ Commercial banks exist primarily to make tary and banking authorities have had to devote Digitized for FRAS6ER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BUSINESS REVIEW their energies to considering how to respond. So, system performs. From my present vantage we have a cumulative effect in the costs involved point, I am convinced that this burden must be in circumventing the restrictive provisions of shared more equitably if the Federal Reserve is banking laws and regulations. to continue to do its job effectively. I repeat, there is nothing morally reprehensible Commercial banks are private, profit-oriented in all this. But it can be wasteful. My preference, businesses. As such, they have an incentive to as a matter of principle, is to rely as much as leave the System if this will increase profits and possible on market forces to discipline bank be­ give them a competitive edge. But they are also havior. The Federal Reserve has plenty of power the principal intermediary for the transmission to safeguard the public interest without building of monetary policy. Therefore, it should be a cumulative structure of detailed regulations to clearly understood that what may be acceptable close each newly discovered loophole. And in a behavior for one bank or a few banks may be free market banks can devote their energies unacceptable for the banking system. Banking more productively to meeting and beating their is not like other industries and it is worse than competition in serving their communities. useless ¿o pretend that it is. And while I can Nevertheless, so long as the Federal Reserve understand why individual banks find it in their is responsible for the public welfare and com­ best interests to leave the* System, it is more mercial banks are responsible for making money, difficult for me to understand why some state the game will go on. So long, however, as com­ banking laws provide incentives for such exits mercial banks respect what the Federal Reserve to occur. Should withdrawals proceed to the is trying to do and the Fed respects what the point where they seriously weaken the ability of banks are trying to do there need be no insoluble the Federal Reserve to carry out its responsibili­ problems. ties as a central bank, the Federal Government My second example has to do with member­ will be forced to act. Meanwhile, states still have ship. I am happy to say that this has not been a an opportunity to assume their share of the re­ major issue so far as New Jersey banks are con­ sponsibility for devising a banking system con­ cerned. It has, hôwever, been elsewhere, and I ducive to effective monetary policy. feel it is so important that I should like to take CONCLUSION this opportunity to make a few observations. Having studied central banking all of my Having looked back over the past, what can I adult years and having practiced it for many of now say about the future? I have limited con­ them, I am convinced of the importance of the fidence in my ability as a forecaster. Thus, had job the Federal Reserve is doing. I know, of I attempted, twenty-eight years ago, to specify course, that there are many different ways to go what the world would be like today, I would about the job and many different ways in which have missed by a wide mark indeed. Events have a central bank may be organized. In the case of moved much faster than I would have dreamed. this country—for many reasons, historical and And so there is little I care to say about where other—commercial banks are linked to the cen­ events will have taken us twenty-eight years tral bank by membership and by reserve from now. requirements. But on the main subject of today—people— These are a means by which the banks—as I feel more confident in forecasting. History private, profit-making institutions—share the demonstrates that the individual has become burden of the public function which the banking more important. And although I would hesitate Digitized for FRASER 7 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis MAY 1969 to project a straight-line trend into the future, I If I am right about this, the objectives of the believe that human values will be given even Federal Reserve, its decisions, and its relations more attention than they are now. with others—including commercial banks—will This message may seem out of place in today’s also increasingly recognize the human compo­ environment of self-guilt, bitterness, and recrim­ nent. The Fed, as a public institution, must, ination. This environment, I believe, is itself a after all, reflect the society which it serves. I reflection of greater concern for people; painful as it is now, we will emerge the better for it. also hope it can at times continue to lead it. Digitized for FRSASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1969, May 21). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19690522_karl_r_bopp

@misc{wtfs_regional_speeche_19690522_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1969},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19690522_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}